Financial Friction

As a service to my local high school football team and town, my Friday nights are mostly spent in a press box with a headset on. I’m not a high school football coach. I have a pretty neat opportunity to color commentate during the local radio station.

**In short, a color commentator is someone who assists the play-by-play commentator and adds details or interesting facts about the teams, individual players, and the game as it progresses.

With this unique opportunity, coupled with the recent and on-going lessons from co-facilitating Dave Ramsey’s 9-week Financial Peace University course, I’d like to give you my insights from the press box.No, this post is not about a recollection from a specific play or even a specific game, but a realization from a game that our society devotes countless hours to and how you can apply it to your financial life.

Football fans know the basics of the game - offense, defense, and special teams. To be consistently good, all three must be accounted for. The same applies to a good financial life:

Offense

From springtime, through summer, to scrimmages, and throughout the actual season, a progression occurs. Teams start with the basics. Laying the foundationto get the team moving in the same direction is crucial. The team sets goals, lifts weights, and practices different movements/drills. As the season nears, implementation of the playbook occurs. Then week by week, as new teams are faced, talent is discovered, and game plans change;ultimately opportunities are capitalizedon.

This is what we must do in our financial life. Realizing a good offense doesn’t just happen is a big key. It begins with intentionality. Laying the foundation by setting individual or joint goals, then implementing a scheme/strategy, taking action to accomplish those goals, maintaining discipline throughout, and adjusting when necessary based on new challenges or discoveries that life introduces.

In short, here are a few things to think about:

Just as a head coach sets the vision/goals for the team, you set the vision/goals for your future

Just asteams adjust from quarter-to-quarter in a game, you have stages in life that you must adjust in to capitalize on opportunities around you

Just as the offensive players practice their plays for the game to score points, you must practice discipline in paying yourself first (contributing money to a retirement plan)

Just as the quarterback manages the play clock by choosing when the ball is snapped, you must manage your budget/spending plan

Defense

Defense is about protecting your side of the field, especially keeping the opponent out of your endzone. The goal is to stop the opposing team from scoring more than your team. Defenses do this by working together as a unit. They take an inventory of their skill sets, they implement different coverages and blitzes, they tackle the ball carrier, cause turnovers, andexecute the game plan.

This is what we must do in our financial life. Just like offense, realizing a good defense doesn’t just happen, so taking steps to be intentional is key. If we know the goal is to keep the opponents from scoring, we first must study their products, learn their sells techniques, and put a guardrail up for ourselves to stay off their turf. We then take an inventory of our assets and implement a strategy based on an evaluation on what assets should be protected. Next, researchcoveragesthatmake sense and that are most effective (cost and protection). As time passes, reevaluate your defense to determine if it’s effective and make sure it’s helping you win the phase.

In short, here are a few things to think about:

Just as defensestake inventory of their skill sets to build depth in positions, you should build depth in an emergency fund for unexpected expenses

Just like the eleven guys on defense that are working to protect their endzone, protect your large assets

Just as a defensive lineman occupies offensive linemen to keep the linebackers free/safe to make a tackle, occupy an appropriate amount of term insurance to keep your family safe if something happens to you

Just as a defensive secondary change their coverage, review your current coverages and see if they still provide proper protection

The adage, defense wins championships is true, but it also ensures your possessions will be protected and your family will be taken care of regardless of unforeseen events.

Special Teams

This phase of the game is most often overlooked or downplayedby spectators until a dynamic play occurs. Mostly focused on the kickers, momentum or even the scoreboard can swing to the opponent in just one kick. Whether it’s a missed point after touchdown (PAT), a 55-yard field goal to end the first half, a punt stopped on the one-yard line by the coverage team, or a punt return for a touchdown, this phase is extremely important.

Most of the time, people groupactions into offense or defense, but I view special teams as financial life occurrences that cansignificantly multiply your chances of winning, give peace of mind, orbe a detriment to accomplishing your goals. Some may only happen once in your life, so as former University of Tennessee head coach General Neyland put it, “Press the kicking game. Here is where the breaks are made.”

In short, here are a few things to think about:

Just asthe kickoff team working hard to get the returner in for a touchdown, working hard at an extra job to maximize your retirement account in the early years can rapidly increase your chances of a successful retirement

Just as a field goal safe or punt safe is called (this means that the rushers do not rush the kicker, but drop back in case a fake field goal or punt is called), have a professionally draftedwill to ensure yourfamily, assets, and last wishes are safeguarded

Just as a team kicking a twenty-yard field goal at the end of a half producing three pointsforgoes the opportunity to score a touchdown (which means the ball is on the three-yard line), review your investments at year end to harvest any losses, if necessary

Just as a snapper snaps the ball over the punter's head into the endzone and the punter tries to pick the ball up, but fumbles it to the other team for a touchdown, an individual can inherit a bunch of money and change their spending habits and fumble the inheritance away

Rates this year have plummeted from the peaks of 2019. I spoke with a couple of mortgage loan originators this week to get the low down here. In East Tennessee you can get around 3 1/2% on a conventional 30 year fixed rate mortgage without buying down the rate. 15 year fixed are slightly above 3%. These rates are hovering around all time lows in the United States.

Maybe you should consider buying a house in Denmark or Amsterdam though. Why? Mortgage rates there are getting really weird. Negative rate weird. They will pay you 1/2% to take out a mortgage in Denmark. Here's a link to the details in case you don't believe me.

Before you start looking for a job and a house overseas, think about a couple of things. Taxes in Europe are out of control and so are home prices.

Even if a move to Amsterdam isn't in the cards, you may want to call a mortgage originator and ask them to run your refinance numbers.

This is the question asked to me so many times every week. Sometimes we are talking about a current matter, and I can answer that question fairly easily. However, there are questions like the one I received recently about a future inheritance that is worth millions of dollars and includes various assets like IRA’s and highly appreciated stock. That answer gets a lot more complex and uncertain.

Why is it so difficult to respond to these questions with confidence? The Tax Cuts and Jobs Act (TCJA) passed in December 2017 was a fairly sweeping change to the tax system for both individuals and corporations. The law lowered individual and corporate tax rates, increased the standard deduction, eliminated personal exemptions, made more people eligible for the child tax credits along with many other changes. But, the law was only put in place through the year 2025 and we have a highly contested political situation right now that could result in changes before 2025.

So, what happens if we make it to 2026 with no changes? If nothing changes, the laws would go back to those in place before the new law took effect. We’ve seen these sunsetting laws before. When the sunset date approaches, the political discussions start as to whether the law should be extended.If we have a political change at the next election, what will it cost me? Kiplinger has an interesting article that outlines each Democratic candidate’s tax plan. Each one has some specifics that make it their plan, but they also have a lot of similarities.

Some common themes of the Democratic Plans are:

Increased tax rates - The increased taxes vary slightly in form, but effectively go back to rates pre -TCJA rates or even higher.

Increase the payroll tax wage base – Currently wages above $132,900 are excluded from Social Security, so several plans eliminate that cap. That’s an additional 12.4% (6.2% employee/6.2% employer) tax.

Increase or eliminate capital gains rates – The current law provides beneficial tax rates to investments that you hold for longer than a year. Several proposals would tax these gains as ordinary income or at a rate higher than the current top rate of 20%.

Estate tax- The estate tax exemption is currently $11.4 million. That means an individual can pass $11.4 million on to heirs without paying an estate tax. The heirs then get a step-up in basis to the fair market value on that date. Most of the plans want to lower that exemption significantly. Several reference returning to 2009 levels of $3.5 million and some even want to eliminate the step-up in basis on certain assets.

Wealth Tax – This is a common term among several plans that want to tax the net worth of the richest Americans. This is an annual tax at 2%-3% on accumulated wealth above an established level.

Tax Credits – Most of the plans try to provide tax credits to help with the costs of caregiving, adoption, and for low income earning families.

So, what will that cost you in taxes? We don’t know for sure right now, but I’m confident it will cost most people more in the future than it does right now. We just don’t know when that change will occur. If any of these changes might impact you, we should schedule some time to discuss.

With the rise in health insurance premiums over the past decade, many individual and corporate health plans now offer a Health Savings Account option. The premiums are often lower than other traditional policies and the benefits of an HSA make this option worth a second look. Individuals can contribute either lump-sum or periodic contributions (up to $3,500 for an individual or $7,000 for a family in 2019) to an account like an IRA. They receive a tax deduction for those contributions, and then can use those dollars to pay for medical expenses, typically up to their plan deductible. Did you know those H S A dollars can be used for other things?

Unlike the old Flexible Savings Account options in health plans that had to be used in the same calendar year, HSA contributions can be invested and used in the future. They can be used for vision, dental or orthodontic care for your children or banked for future health or even long-term care insurance premiums.

In one specific example, a 55-year-old with family coverage who plans to retire at age 62 contributes $7,000 plus a $1,000 catch-up contribution if they are covered by a high deductible plan. They receive a tax deduction on that contribution and can use those dollars to pay for their annual health care. Let’s say the same individual has a $3,000 deductible which they meet each year for 7 years.

Annual Contribution

$7,000

55 + Catch up

$1,000

Total

$8,000

Annual Spent

$3,000

Net Savings

$5,000

At his retirement, he would have $35,000 ($5,000 x 7 years). Since he retired before age 65, he can use those health savings dollars to purchase COBRA insurance if offered by their employer, or to buy individual health insurance coverage before Medicare kicks in. In the same scenario, if the 55-year-old has a long-term care insurance policy with annual premium of $2,500, he can use the same HSA dollars to pay those premiums in retirement.

Health savings accounts are incredible planning tools for future health care needs especially if you plan to retire early. These accounts allow individuals to defer taxes on contributions during their working years, when their tax rates tend to be higher. They can then use those dollars in retirement to pay for health premiums or expenses, often at a lower rate.

If you currently are covered by a high deductible plan and aren’t contributing the maximum, the above examples may change your mind. If you don’t have an HSA, I’d encourage you to research your options when your annual benefits enrollment or health insurance renewal rolls around. The diagnosis will likely be good for your future.

Despite earning the title of “Highest-Paid (Cumulative) Running Back in the history of the NFL,” collecting just shy of $100 million throughout his 12-year NFL career, Adrian Peterson has gone from hero (money wise) to less than zero.

We’ve all heard the rags to riches stories in the athlete realm, whether it be Michael Oher, Lebron James, or Manny Pacquiao. Unfortunately, we’ve also commonly heard the contrary. Poor investments, reckless spending, and even divorce (but not limited to) have each been a cause of reduced wealth. Whatever the circumstance, there are usually three commonalities between each rich to rags story – behavior, mistrust, and a result of shame.

Behavior

I know what you’re thinking… “if only.” If only I had $99 million, there would be no way I could possibly spend it to zero.

Let me propose a short scenario to show you how this happens to the average individual/household:

Your gross salary is $50,000 annually and you live a comfortable lifestyle. You are able to cover your daily living expenses, your mortgage, and your car payment. In addition, you aren’t too conscious about your spending, because you think you have no reason to be. You also spend almost every dollar after your fixed expenses are taken care of. You spend your “extra” on entertainment, eating out multiple times a week, and taking spontaneous weekend trips once or twice a month.

One day your boss walks into your office and praises you for your efforts and dedication to the company you’ve displayed over the past two years. He rewards you by increasing your annual income by 50% effective the following year - resulting in a $25,000 pay raise.

As you receive your pay raise, you begin to get excited and your “dreamer” mentality begins to take over. At the beginning of the next year, your monthly income has significantly increased. You “suddenly” begin to get tired of the car you drive and decide to purchase a new one – doubling your monthly payment. You also decided to move into a new home on the opposite side of town, which increases your monthly mortgage payment significantly. Oh, and that jet ski you’ve seen your neighbor pull into their garage… Yeah, you bought one of those too.

See how quickly your $25,000 raise can be wiped out. This is a result of poor behavior and impulse spending. Just like APs multi-million-dollar contract(s) got the best of him; your raises can get the best of you.

Solution: Create a zero-based budget. A zero-based budget is simply taking your income and subtracting your expenses to equal zero. This means give each dollar you earn a purpose.

Mistrust

“The truth behind Adrian Peterson’s current financial situation is more than is being reported at this time. Because of ongoing legal matters, I am unable to go into detail, but I will say this is yet another situation of an athlete trusting the wrong people and being taken advantage of by those he trusted. Adrian and his family look forward to sharing further details when appropriate.”

The statement above made by attorney Chase Carlson claiming fraud on AP’s behalf may be accurate, of course only time will tell. Yet, although AP may be a victim of this classless act, the problem is deeper, and it cannot be pawned off just on mistrust alone. Trust is assured reliance. Most point fingers, but from my experiences when one is pointed, there are four pointing back. In any situation whether it be with $99 million or $50k, at times trust is initially misplaced in ourselves. We believe we have the awareness and financial acumen to manage our new circumstances, even without previous experience or insight. AP had choices, whether he pawned off responsibility in a “trusted” attorney or businessman, AP is still left in a situation resulting from a form of mistrust.

Solution: Seek wise counsel and properly conduct due diligence.

Shame

$99 million to $0. That is a shame. Unfortunately, this story is too common and unfortunately (or fortunately if someone will learn from it) it is public knowledge. Whether it’s a businessman, a movie star, an athlete or even the common man – shame is the result of poor behavior and misplaced trust. AP has sacrificed his body for years – pee-wee football, middle school, high school, college with the Oklahoma Sooners and now 12 years on the grandest stage. All these years of brutal wear and tear on his body with no financial gain to show for.

Solution: Stand in the shoes of AP and observe his shame to avoid shame for future self. Start beginning with the end in mind.

Takeaways

• Implement a zero-based budget and if you don’t like the word budget, call it a spending plan. Spending plans are implemented to minimize regret and maximize your freedom while staying inside the guardrails you placed.• We all think we know what we should and would do when facing a new circumstance, especially when it comes to a windfall of money. If/when this occurs to you, take a step back, seek wise counsel and conduct due diligence before you place your trust and financial future with them. • The only way to avoid shame is to internalize someone else’s “mistake” and do the opposite. One way to do that is to follow Stephen Covey’s advice of beginning with the end in mind.

In a controversial 1945 cartoon, Bugs Bunny pops up from burrowing underground. He realizes that he is in the Black Forest of Germany controlled by Nazis (note the release date). Bugs famously quips, "I knew I should've made a left turn at Albuquerque!"

A contemporary, seven minute viewing of "Herr Meets Hare" would require some viewers to look past Bugs fat shaming a rotund, lederhosen wearing Hermann Göring character, donning "blackface" to spoof Hitler and finally Bugs as Joseph Stalin in the climax scene. It added up to spicy political commentary at the end of World War II that was shown as propaganda to German POWs while Warner Bros prohibited it from being broadcast.

As investors are trying to decide how to get to their destination, potential detours and distractions abound.

This week the entirety of Germany's government bond issuance rallied to produce negative yields. Every Bund, as they are called, from 3 month to 30 year maturities now return less at maturity than what an investor would pay for one.

If this illogical financial condition existed in the 1940's, Germany may have won WWII. This negative rate phenomenon isn't unique to Germany. This is a pan-European head-scratcher. Swiss bank/broker UBS announced that they will start charging their wealthiest customers 3/4% for the privilege of leaving funds on deposit. Thanks to the European Central Banks policy actions, more than 1/3 of all bonds on the continent now have a negative yield.

To think that we were buying bonds at a discount to maturity value this time last summer. Big changes since then and I fear there are still more to come for "bond" investors. https://t.co/Alx3Vk9Msh

In the face of these negative rates from Europe washing up on our shores, our own central bank, The Federal Reserve, announced a 1/4% rate cut. This rate cut was anticipated by investors but Fed Chairman Jerome Powell stunned markets by obfuscating the Feds future intentions at his press conference with a quagmire of double speak. Will they cut again later this year or was this a one-and-done move?

A bevy of weak macroeconomic data released this week justified the Fed's near-term nervousness though. The economy is clearly slowing down. The question we've pointed out is a simple but profound observation: Is this weakness a natural by-product of the Feds rate increases last year or is the problem cyclical in nature and foreshadowing a deeper downturn or heaven forbid, a recession.

ISM Manufacturing Index and US Financial Conditions Index

Great chart suggesting that the #ISM#PMI Index could be below 50, and bounce back due to the drop in interest rates around the world https://t.co/njh8ngbzXp

To add fuel to the fires of uncertainty, Trump poured pressure on China by adding new tariffs on imported Chinese products. By doing so, Trump's trade shaming is designed to bring China back to the negotiation table instead of waiting until the Presidential election in 2 years. It remains to be seen if his strategy will be effective before the drag from tariffs stilts consumer activity.

Taken in totality these three signposts point to different potential outcomes. Investors need to think through this crazy set of events to assess what could impact their investment accounts. If Trump brings the trade battle with China to a successful conclusion, that would be viewed as pro-growth by markets. The Fed would walk back talk of further rate cuts and the bond market would have a migraine headache.

If this tariff impasse persists, US consumers, who are already signaling spending fatigue, will be shouldered with keeping the world out of recession. That's a really big "ask". With the never-ending, adversarial political tone in our country right now, Americans are being constantly cajoled in opposite directions. Don't let these distractions affect you. Stay diligent and clear headed even if you find yourself in the minority. That's the best advice to avoid ending up in the "Black Forest".